Financial Crisis and Banking Industry (Essay Sample)

Financial Crisis and Banking Industry:
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Financial Crisis and Banking Industry
Introduction
A financial crisis is a situation that occurs when financial assets or institutions such as banks suddenly lose large parts of their normal value. This will occur when the supply of money is out spaced by its demand. The financial crisis of 2007 was the worst since the great depression that had occurred in the 1930s.Reintroducing the whole globalized world to an era of credit crunch, massive layoffs, private defaults and bank failures caused panic all over in the interdependent economy. The global imbalance explanation of the financial crisis of 2007-2009 suggests that demand for risk less assets from countries with current account surpluses created fragility in countries with current account deficits, most notably in the United States, (Acharya, 2010).
Financial crisis started in the US as a result of events in housing market and has spread to all other regions of the world. Financial crisis has important implications to banks, investors, companies and governments. All over the world, stock markets and large financial institutions have fallen or brought out, while governments. Global financial crisis is threatening economic and financial development of all parts of world. One general acceptable fact cause is that global is rising as a result collapsing of free market forces.
As a banking rule, interest must be paid on loans that banks make, but with debt rising quicker than the incomes some of the people could not keep up with repayments and it was at this point that people stopped paying and banks were in danger of going bankrupt. This is what caused the financial crisis as banks cut lending and people stopped borrowing from them and people started selling their assets to repay the loans. As a result, bursting of the bubble occurred resulting in sharp drop of the prices. The financial crisis of 2007-2009 highlighted the changing role of financial institutions and the growing importance of the shadow banking system, which grew out of the securitization of assets,(Adrian, 2011).
The downward spiral begun when asset markets and the stocks crash and customers were unable to repay their loans and these turned banks insolvent. After the crisis, banks stopped lending and this in the long run lead to shrinking of the economy. The financial crisis that started in the wake of 2007 reached a climax with a wave of bank nationalizations across North America and Europe bailed. (Barrell, 2008).The very first high profile casualty of the 2007 financial crises was The Northern Rock Bank of England. It was one of the largest British mortgage lenders before being bailed out from the bank of England. Northern rock was unusual among UK mortgage banks in its heavy reliance on non retail funding, (Yorulmazer, 2008). In the United States, over 68 U.S banks have also become insolvent as a result of the crisis and they have been taken over by F.D.I.C (Federal Deposit Insurance Corporation).The largest of these banks to be acquired included, Merrill Lynch Bank which was bailed out by The bank of America, The Bear Stearns bank and Washington bank which were bailed out by JP Morgan Chase.
In addition to this, the number of bank downfall has skyrocketed with a continuation of climbing and stock plummeting. In response to the great economic recession and the conditions of the banking industry, banks fixed tight lending terms to unprecedented levels. The tightening of bank lending could undermine the e economic recovery while the SLOOS data provide qualitative evidence on the changes in bank loans supply.
Finally, the number of new bank entry has declined sharply from 2013, only 22 banks entered compared to 132 in 2007. With witnessed exit occurring for the first time since 1995, slight decline of foreign banks has been occurred. As active domestic banks drop, the overall foreign bank share increases tremendously, but since foreign bank’s balance sheet has grown relatively less compared ...